Ultra Easy Monetary Policy and the Law of Unintended Consequences

The central banks of the advanced market economies (AME’s) 3 have embarked upon one of the greatest economic experiments of all time ‐ ultra easy monetary policy. In the aftermath of the economic and financial crisis which began in the summer of 2007, they lowered policy rates effectively to the zero lower bound (ZLB). In addition, they took various actions which not only caused their balance sheets to swell enormously, but also increased the riskiness of the assets they chose to purchase. Their actions also had the effect of putting downward pressure on their exchange rates against the currencies of Emerging Market Economies (EME’s). Since virtually all EME’s tended to resist this pressure4, their foreign exchange reserves rose to record levels, helping to lower long term rates in AME’s as well. Moreover, domestic monetary conditions in the EMEs were eased as well. The size and global scope of these discretionary policies makes them historically unprecedented. Even during the Great Depression of the 1930’s, policy rates and longer term rates in the most affected countries (like the US) were never reduced to such low levels.

Editor's Note: The paper's author, William R. White, is a world renown Canadian economist. Beginning in 1972, Mr. White spent 22 years at the Bank of Canada eventually becoming the Bank's Chief of the Research Department. He then went on to be the Deputy Governor of the Bank of Canada in 1988. 

In 1994, he joined the Bank for International Settlements as Manager in the Monetary and Economic Department. From May 1995 to June 2008, he served as its Economic Adviser and Head of the Monetary and Economic Department.
He predicted the financial crisis of 2007–2010 before the 2007's subprime meltdown. He was one of the critics of Alan Greenspan's theory of the role of Monetary Policy as early as 1996. He challenged the former Federal Reserve chairman's view that central bankers can't effectively slow the causes of asset bubbles. On Aug. 28, 2003, White made his argument directly to Greenspan, at the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. White recommended to "raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.". Greenspan was unconvinced that this would work and said: "there has never been an instance, of which I'm aware, that leaning against the wind was successfully done" - Wikipedia

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Pooled Registered Pension Plans: Pension Saviour – or a New Tax on the Poor?

Firstly, we demonstrate that many lower-income and middle-income workers who save for retirement should not do so in tax-deferred accounts because if they do, they will pay taxes and government benefit clawbacks on withdrawals in retirement at rates that are significantly higher than the refundable rates that apply to contributions. Over a lifetime, these workers would be much better off financially to save for retirement in existing Tax-Free Savings Accounts (TFSAs). Therefore, we propose that tax rules be amended to allow tax-prepaid saving within PRPPs.

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The Lost Decade of the Middle Class

For the middle-income group, the “lost decade” of the 2000s has been even worse for wealth loss than for income loss. The median income of the middle-income tier fell 5%, but median wealth (assets minus debt) declined by 28%, to $93,150 from $129,582.30. During this period, the median wealth of the upper-income tier was essentially unchanged—it rose by 1%, to $574,788 from $569,905. Meantime, the wealth of the lower-income tier plunged by 45%, albeit from a much smaller base, to $10,151 from $18,421.

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U.S. Consumer Debt Levels and Composition

From 2003 to 2007, U.S. households increased their debt levelsby 10.2% per year. Debt growth slowed considerably in 2008 as the recession began and has decreased by 2.8% per year from 2009 to the firstquarter of 2012. Recent data from the Quarterly Report on Household Debt and Credit by the Federal Reserve Bank of New York is summarized in the chart below. After U.S. household debt peakedin the fourth quarter of 2008 at approximately $12.7 trillion, the trend has reversed with a decline to approximately $11.4 trillion at the end of the first quarter of 2012. 

Editor's Note: The decline in consumer debt levels is supportive of our view that a long-term shift from a Credit Expansion Phase to Credit Contraction Phase began in 2008. We feel this shift in the credit cycle is an important long-term factor investors need to understand as it reverses many accepted long-term 'tail-winds' for economies and capital markets.

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What explains high interest rates in Europe?

Our new research suggests an alternative explanation; private sector issues with creditor seniority. An increasing share of total debt that is held by public creditors (ECB, EFSF/ESM, and IMF, etc) and the total is rising due to the ongoing rescue operations. Under current rules, these public creditors jump to the head of the queue if things go wrong. They have senior status in case of insolvency. The remaining public debt is thus a junior tranche. As such, it requires a higher marginal interest rate. 

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Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital

Retiring babyboomers are driving a shift from retirement fund accumulation to decumulation, a phase in which they must balance present financial needs against longevity risk. 

For Canadians with pre-retirement income in the $40,000-$50,000 range or higher, deciding how and when to access private savings will significantly affect the lifestyle that can be achieved in retirement. The process people use to access private savings must balance the need for income in the present with the need for income in the future. The decisions made regarding this decumulation – including those about whether to annuitize, and how much and in what forms – will determine the extent to which a retiree is exposed to liquidity risk or longevity risk (as well as inflation risk, which can be related to both).

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Short on Savings, Canada's 50-Somethings plan to retire at age 63 - and keep working

Many boomers in the survey felt they had come up short of what they expected to have saved by this stage in their life, with 45 per cent having saved less than $100,000.

The good news for boomers is that their late 50s and early 60s can be good years for building savings, particularly if cash flow improves as debts, such as a mortgage, are paid off. Those who plan to continue working in retirement may be able to leave their savings untouched for a number of years, using the income from their employment to replace what they would normally draw from their retirement savings.

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Q3 Investor Sentiment - June/July 2012

More than a third of investors said they've shied away from risky investments over the last six months, according to a new survey released by TD Ameritrade.
That's 12 percent more than the same survey issued three months ago, and most of the blame lies in a sluggish economy––both in the U.S. and overseas, says a firm representative.

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Liquidity as an Investment Style

We first show that liquidity, as measured by stock turnover or trading volume, is an economically significant investment style that is distinct from traditional investment styles such as size, value/growth, and momentum. We then introduce and examine the performance of several portfolio strategies, including a Volume Weighted Strategy, an Earnings Weighted Strategy, an Earnings-Based Liquidity Strategy, and a Market Cap-Based Liquidity Strategy. Our backtest research shows that the Earnings-Based Liquidity Strategy offers the highest return and the best risk-return tradeoff, while the Volume Weighted Strategy does the worst. The superior performance of the liquidity strategies are due to equilibrium, macro, and micro reasons. In equilibrium, liquid stocks sell at a liquidity premium and illiquid stocks sell at a liquidity discount. Investing in less liquid stocks thus pays. Second, at the macro level, the growing level of financialization of assets in the world makes today’s less liquid securities increasingly more liquid over time. Finally, at the micro level, the strategy avoids, or invests less, in popular, heavily traded glamour stocks and favors out-of-favor stocks, both of which tend to revert to more normal trading volume over time.

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Gold Demand Trends, Second Quarter 2012

Gold demand for the second quarter of 2012 measured 990 tonnes, 7% below year-earlier levels. Weaker demand from jewellery, investment and technology sectors was offset to some extent by a surge in buying by the official sector. The supply of gold declined 6% year-on-year, mainly due to lower levels of recycling. The gold price averaged US$1,609.49/oz during the quarter, 7% above the average the Q1 2011 price; consequently there was only a marginal 1% year-on-year decline in the value of gold demand to US$51.2bn. Looking at the first half of 2012, gold demand of 2,090.8 tonnes was 5% down on the previous year and 14% above the five-year H1 average of 1,828.7 tonnes.

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IIROC Wants Advisors To Justify Compensation

As a general principle, we expect that a Dealer Member or individual adviser will only move a client from a commission-based account to a fee-based account (or vice-versa) when such a change in service offerings is demonstrably beneficial to the client. The absence of any demonstrable benefit, depending on the facts and circumstances of the case, may give rise to regulatory scrutiny and, in more extreme cases, disciplinary action.

In light of the foregoing, best practices suggest that Dealer Members should document the specific factors that establish the suitability of a new commission- or fee-based account at the time that it is opened, and where the client is being switched from one account type to another, the factors that led to the transfer.

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Global Insight Weekly - August 10, 2012

Central bankers and government officials continue to play a dominant role in shaping global financial market returns. No doubt some investors are nervous about their ability to deliver or are troubled by their influence. Right or wrong, markets seem willing to take policymakers at their word—at least for now.

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Q2 2012 Earnings Insight

Earnings Scorecard: Of the 447 companies that have reported earnings to date for Q2 2012, 70% have reported earnings above the mean estimate, but just 43% have reported sales above the mean estimate.

Earnings Growth: The blended earnings growth rate for Q2 2012 is 5.5%. The Financials (60.2%) sector is reporting the highest earnings growth rate for the quarter while the Energy (-22.1%) and Materials (-15.9%) sectors are reporting the lowest earnings growth rates.

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Market Indices, Asset & Risk Management Numbers: July 31, 2012

This is a great summary of the markets' recent performance - Stock and Bond Markets, Benchmark Portfolios.

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Update On Canadian Banks

With European banks and sovereigns in the spotlight again, investors have been wondering about Canadian bank exposures to this troubled region. The issues plaguing Europe could be with us for some time, creating the potential for financial market dislocations, elevated counter-party risks, and global bank funding concerns. The most recent bout of risk aversion has contributed to a 10% decline in the S&P/TSX Bank Index from its recent high in March of this year. A stabilization of macro economic conditions and the debt crisis in Europe could lead Canadian banks to be re-rated to higher price-to-earnings multiples. Historically, the banks have traded in the 11-13x P/E range, while the current average is under 10x on 2013 earnings. In a recessionary scenario for Canada, earnings estimates could fall 10%-15%. Even within the context of this kind of decline, the earnings multiples paid at current prices would be modest when compared to historical averages.

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